Total Return Withdrawal Decision

[marko]

I suspect this has been covered a few times before but I can't seem to find it easily.

I'm a dyed-in-the-wool "live off the dividends" person, but I'm wondering for you "total return" types how you decide which stocks/funds to sell when you need cash.

Beyond regular re-balancing, if you unexpectedly needed $10K-$20K suddenly, you need to sell some stocks/funds:
Would you sell the laggards that aren't going anywhere?
The great performers because you expect to re-gain the balance via growth?The ones that will help tax-wise?

Is there some common criteria or is it YMMV?

 

[Scuba]

I choose selling things with the lowest capital gains, unless there is something I’m holding that I think I should sell anyway. No reason to pay more tax than necessary, but also I try not to have taxes be the only consideration. Investment quality/potential is more important but assuming I wouldn’t be holding it if I didn’t like it as a current investment, tax impact makes my decision for me.

 

[pb4uski]

Not sure it matters much because you'll eventually rebalance anyway.

 

[audreyh1]

I suspect this has been covered a few times before but I can't seem to find it easily.

I'm a dyed-in-the-wool "live off the dividends" person, but I'm wondering for you "total return" types how you decide which stocks/funds to sell when you need cash.

Beyond regular re-balancing, if you unexpectedly needed $10K-$20K suddenly, you need to sell some stocks/funds:
Would you sell the laggards that aren't going anywhere?
The great performers because you expect to re-gain the balance via growth?The ones that will help tax-wise?

Is there some common criteria or is it YMMV?

I usually have ample short-term funds that will easily cover such needs and don’t have to draw on any long term investments.

If I did, I would rebalance keeping an eye on taxes.

 

[GravitySucks]

Up to this year I have not worried about MAGI and drew from my 401k/IRA by selling the winners to rebalance when pulling spending cash.
Started ACA insurance this year and will be more concerned with keeping AGI down than AA balancing the next 3 years.
For a large expense I suppose I'll sell low gainers out of the non sheltered account.

 

[RunningBum]

For now I have enough short-term / cash funds to cover things like this.

Before that, it was taking from the overweight funds to try to bring my AA back into balance. Within those funds, selling off the shares with the least gain.

Now that I'm over 59.5 I can take tax-free from about half of my HSA, and my Roth, if I'd rather not incur any capital gains.

 

[Blue531]

For the next few years, I only have 2 funds available to withdraw from. I chose the one that has the lower return and don't wish to touch the one that has had a higher return and still has much more potential to grow. I'm in the lowest tax bracket and don't have to pay long term capital gains tax unless I exceed a significant amount, for me anyway.

 

[sengsational]

YMMV, I think, but with underlying principles. If your after tax bucket doesn't have significant capital gains, then there's not much of a tax component in the decision. Or if your after tax bucket is just one fund, the decision is made for you. Concurrently with this move, if the move would throw off your AA, then you'd have transactions in the pre-tax bucket. This prevents "selling low" if equities are depressed at the time, and equities are what you have to liquidate.

 

[corn18]

I only have 3 funds so not a big decision. I’ll withdraw from whatever is overweight in my AA to get back to my target. Right now, I am overweight domestic stock, so if I needed money, I would sell some of my total US stock fund. Life is simple when you have a 3 fund portfolio.

 

[ERD50]

I choose selling things with the lowest capital gains, unless there is something I’m holding that I think I should sell anyway. No reason to pay more tax than necessary, but also I try not to have taxes be the only consideration. Investment quality/potential is more important but assuming I wouldn’t be holding it if I didn’t like it as a current investment, tax impact makes my decision for me.

Yes, this, plus taking re-balancing into account (which I guess fits in with the "something I’m holding that I think I should sell anyway" from above).

-ERD50

 

[OldShooter]

At this point all of our assets are in retirement accounts with all div. reinvested. I douldn't even tell you what the dividend payment % is. Funds until a couple of years ago were total market and total international. The Roth withdrawalas are limited to RMDs.

Withdrawals from the IRAs are pretty much finger-in-the-wind. We withdraw dribs and drabs during the year, maybe adding up to 3-4%. If equities are strong, we withdraw from that tranche. If equities are weak we withdraw from the fixed income tranche. If things get out of whack (rare) we rebalance.

IMO exact rebalancing is a waste of time, but a lot of people seem to enjoy it. Good for them but I have seen no data that says precision in this area has any payoff. IIRC returns are similar from 60/40 to 40/60.

We do not buy individual stocks. We also do not go to casinos.

 

[yakers]

Very logical question to me. Have an unplanned (but happy) event that younger son is getting married and DW & I want to send some $ to add to a home buying fund. So have to raid the accounts, what to sell? Well we have a lot of cash (11-15% of AA) so it will come from there but will want to rebalance to keep AA around 55/45 to 60/40. So the first thing I look at is reducing small stock holding that have accumulated to simplify and selling stocks with low capital gains. Over on the pretax side may have to adjust but that has no tax impact. I like my holdings, would like to have more, everything just feels too expensive and no good places for fixed income.

 

[TheWizard]

Most of my financial assets are still in tax-deferred accounts, so I just withdraw monthly, pro rata, whether I "need" the money or not.
It's more of a tax management strategy, similar to RMDs which start for me in 2023.

Pro rata means proportional across the various investments in my account.

If I "need" an unexpected lump sum for something, I would take the money from some combination of my checking account, taxable account, and Roth account...

 

[chassis]

I suspect this has been covered a few times before but I can't seem to find it easily.

I'm a dyed-in-the-wool "live off the dividends" person, but I'm wondering for you "total return" types how you decide which stocks/funds to sell when you need cash.

Beyond regular re-balancing, if you unexpectedly needed $10K-$20K suddenly, you need to sell some stocks/funds:
Would you sell the laggards that aren't going anywhere?
The great performers because you expect to re-gain the balance via growth?The ones that will help tax-wise?

Is there some common criteria or is it YMMV?

YMMV. IMO it's an opportunity to prune the dead wood. It requires you to evaluate what is, and what isn't, dead wood in the portfolio. Which means evaluating the future prospects of each holding in the portfolio at the time you are deciding to sell. If this is done regularly/actively, it's not a big job. If a person looks at their investments seldom, it will take some time to get into the game and analyze the holdings.

If, after analysis, there is no dead wood and all positions hold promise, I would sell portions of holdings that have long term capital gains.

 

[CardsFan]

YMMV. IMO it's an opportunity to prune the dead wood. It requires you to evaluate what is, and what isn't, dead wood in the portfolio. Which means evaluating the future prospects of each holding in the portfolio at the time you are deciding to sell. If this is done regularly/actively, it's not a big job. If a person looks at their investments seldom, it will take some time to get into the game and analyze the holdings.

If, after analysis, there is no dead wood and all positions hold promise, I would sell portions of holdings that have long term capital gains.

And this is why it is a very individual decision, as I do the exact opposite (in the after tax account). I sell off bond funds that are near par value.

But, I am looking at controlling income for Roth conversions. Others are looking at controlling for ACA subsidies. So, it all depends.

FWIW, we have sufficient cash on hand to handle the OP's $10-20k example, so really I am talking about the BIG stuff. A new car, yearly living expenses, etc.

As far as rebalancing, I have never made an effort to do this in great detail. We have several Mutual Funds that do that internally. In order to lower our Equity position I take most Int/Div/Cap Gains as cash. In after tax account I spend them. In tIRA they get re-invested in bonds/CD's/Cash. I do let the Roth accounts reinvest, as I never intend to tap those accounts. They will go to DS.

 

[RetireAge50]

We have our portfolio split evenly between cash, growth fund, value fund, and S&P 500. We would get our money from wherever makes the most tax sense and then immediately rebalance.

 

[SALTedOut]

I'm a dyed-in-the-wool "live off the dividends" person,

So an equally fair question, IMO, is what happens if you have an unexpected large expense that exceeds your "dividend only" draw? Do you just not fix the roof or what do you decide to sell?

Isn't that the same questions? I don't see the difference.

 

[ERD50]

Quote:
Originally Posted by marko View Post
I'm a dyed-in-the-wool "live off the dividends" person,

So an equally fair question, IMO, is what happens if you have an unexpected large expense that exceeds your "dividend only" draw? Do you just not fix the roof or what do you decide to sell?

Isn't that the same questions? I don't see the difference.

I'm curious about this as well. -ERD50

 

[2017ish]

After three years of retirement, we became 100% Roth/TIRA. We withdraw our expenses from TIRA and then convert to roth to full extent of 32% bracket. We are on an increasing equity glidepath (and seek to have 100% equity in Roths for now), so we default to taking more from non-equity than from equity--and then, at least recently, fix it on the rebalancing end.

 

[DrRoy]

I choose selling things with the lowest capital gains, unless there is something I’m holding that I think I should sell anyway. No reason to pay more tax than necessary, but also I try not to have taxes be the only consideration. Investment quality/potential is more important but assuming I wouldn’t be holding it if I didn’t like it as a current investment, tax impact makes my decision for me.

+1

 

[target2019]

I suspect this has been covered a few times before but I can't seem to find it easily.

I'm a dyed-in-the-wool "live off the dividends" person, but I'm wondering for you "total return" types how you decide which stocks/funds to sell when you need cash.

Beyond regular re-balancing, if you unexpectedly needed $10K-$20K suddenly, you need to sell some stocks/funds:
Would you sell the laggards that aren't going anywhere?
The great performers because you expect to re-gain the balance via growth?The ones that will help tax-wise?

Is there some common criteria or is it YMMV?

You raise important questions I have not had to answer. Yet...

If we had followed the one-fund advice in our taxable brokerage, then I'd look at possibly selling offsetting lots to wipe out gains, or sell lots with least gain.

Since we have maybe 30 positions though, there's probably something we could sell in total to simplify.

But the reality is we have several years of cash and CDs. Sufficient cash is in hi-yield to cover the wedding bills, for instance.

 

[marko]

So an equally fair question, IMO, is what happens if you have an unexpected large expense that exceeds your "dividend only" draw? Do you just not fix the roof or what do you decide to sell?

Isn't that the same questions? I don't see the difference.

I'm curious about this as well. -ERD50

Well, our dividend income tends to exceed our spending, so there's a savings buffer there built up over the years that a new roof wouldn't deplete.

If we needed a lot of cash, I'd sell some stock/funds and pray to God that my "never touch the principal" grandfather doesn't rise up and kill me.

But the fact is, I wouldn't know how I'd decide what to sell, hence my OP.

 

[RunningBum]

Well, our dividend income tends to exceed our spending, so there's a savings buffer there built up over the years that a new roof wouldn't deplete.

If we needed a lot of cash, I'd sell some stock/funds and pray to God that my "never touch the principal" grandfather doesn't rise up and kill me.

But the fact is, I wouldn't know how I'd decide what to sell, hence my OP.

Then why did you target "total return" investors with the question? Wouldn't it be more pertinent to you to ask "live off the dividends" investors?

 

[marko]

Then why did you target "total return" investors with the question? Wouldn't it be more pertinent to you to ask "live off the dividends" investors?

Because total return investors (as I understand it) must make that decision every time they need money while for dividend investors its less common. Id assume total return folks to be expert in the subject.

Or maybe I misunderstand the term.

Outside of re balancing, selling shares to generate income is an entirely foreign concept to me. Sorry if I'm off base.

 

[pjigar]

Sell the laggards' especially if you are pulling money from brokerage account. Either way, laggards are the logical choice. I was just reading the Mental Accounting article yesterday which has a specific mention of this dilemma.

To help you stay logical, think about this: Laggards are throwing the lowest return on the invested capital so your capital is not efficiently utilized.